Credit appetite and the changing landscape

In the wake of the financial crisis, alternative consumer lending has emerged as a growing segment of consumer borrowing; as many financial institutions pulled back from non-prime consumer segments by reducing credit. Alternative consumer lending includes peer to peer loans, credit union loans and short term lending. Critics argue that some types of loans have a detrimental impact on low-income borrowers and that non-bank providers in this space are less tightly regulated than banks. Supporters, on the other hand, contend that greater access and choice in financial services provides consumers with better control over their finances. In any case, alternative consumer loans are a growing part of the diversifying consumer lending landscape, combined with competition from new faces in the banking market place.

The estimated number of short term loans taken out in 2011/12 was a huge 8.2 million. Many consumers take out five or six of these loans over the course of a year, with an average loan balance of £265 - £270, according to OFT research. These were typically taken over 30 days.1 Peer to peer lending is also growing in popularity, with more than £417m lent in total since 2005, by the three biggest operators in this market.2

As a result of the events of the last four years, traditional credit providers have become more risk-averse, but that doesn’t mean that the demand for credit amongst all consumer groups of society has fallen. Interestingly, we are seeing a significant shift of consumer attitudes towards credit. Consumers whose disposable incomes remain stable and could have easy access to credit, have also become wary of risk. Yet those who were hit hardest by the reality of falling real wages, increasing inflation, unemployment and uncertain property values are struggling to make ends meet and they are turning to alternative sources of credit, such as credit unions and short term loans. The credit providers that make it difficult for customers with low credit ratings to access traditional credit facilities, are at risk of losing customers.

Disenchantment has fuelled new strategies

The main attraction of alternative lenders has been the efficiency of their business model. Consumers have become disenchanted with the banking system in general, therefore offering a simple, transparent service is proving extremely popular. There’s no reason why banking groups can’t match the service or products offered by alternative lenders - if they choose to be quick to adapt to the changing marketplace. There is also a genuine need for short term finance - people don’t necessarily want to lock themselves into credit for two or three years. The tightening risk criteria of traditional lenders, means that although customers may like more credit, they are unable to access it.

Ultimately, credit hungry customers want instant decisions and instant cash. Automating affordability decisions could put mainstream lenders on a par with this new era of instant cash – but in a responsible manner. Customers want access to information before purchasing, enabling them to make the right choice; they want to consult their online networks to obtain feedback on the products and services that they are considering buying. They also want access to the necessary means to make purchases wherever they are, receiving suitable advice either at the point of sale or via remote channels; and they want an enhanced check-out experience thanks to better designed and more welcoming physical points of sale. The Financial Conduct Authority (FCA) will be putting greater scrutiny on new product development, therefore speed to market with competing products of this nature, may take more time.

A genuine need for healthy, regulated competition

Product development may be subject to more regulation, but the ease for new lenders to emerge into the marketplace is set to improve. The FCA and the Bank of England have published the results of a review into barriers for new entrants to the banking sector. They out significant changes to regulatory requirements and authorisation processes, which aim to reduce some of the regulatory barriers and facilitate an increased competitive challenge to existing banks.

The rise in other forms of borrowing has coincided with a lack of willingness on the part of high street banks to lend. A principle concern of banks is potential damage to their corporate reputation. The perception is that high-interest short term loans take advantage of vulnerable, low income customers and lead them into further debt. However, alternative lenders are now putting responsible lending at the core of their strategies, being prompted by the OFT to tighten their affordability assessments. More data sharing between lenders, would make it easier for them to meet required affordability checks. It’s important to have a protective regulatory environment and it’s important that companies should comply not only with the regulations, but also with the spirit of them. But what’s really important is that the extra regulation shouldn’t stifle competition. What customers need are more lenders offering a variety of products and competing healthily with each other.

Geoff Hunkin

Geoff heads up Experian’s Client Consulting team for our UK&I Credit Services business, positioning our best practice tools, data and analytics for our clients. From a strong IT background with over 25 years experience of providing solutions to the banking and financial services industry, Geoff has extensive knowledge of credit risk systems and specialises in web services and business systems integration.

Leading product development and delivery teams at Experian, Geoff has delivered risk management and decision systems into every major UK bank and finance organisation and is a member of the Financial Services Forum.

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